We love small businesses.
They're creative, flexible, personable.
They are often the source of neighborhood vibe and pride.
But because of their size, they also don't grow in value very much.
Companies that remain below $500,000 in EBITDA (your earnings before interest, taxes, depreciation, and amortization) struggle to get much more than 2x-3x earnings in a sale.
And that is if they can sell at all.
To sell they've managed to remove themselves from critical roles and company dependency on their skills and contacts.
And they've managed to put a team in place that can run the business without them.
Businesses that do move past their founder's skills and input, and grow to multi-million dollar EBITDA businesses, will see a higher return on their earnings when they sell, often attracting offers at 4.0x earnings and up.
The primary reasons behind the higher value are the greater stability that comes with a larger earnings base, as well as the broader market interested in buying businesses as they grow.
A quick example on the powerful impact increased business size has on business value. A small business reporting $500,000 in earnings would in most cases be valued by a potential buyer at an average 2.5x those earnings, so approximately $1,250,000.
A larger version of that business, with earnings of $2,000,000, would attract a broader range of buyers, and with a more substantial and stable earnings base, likely sell for 4.0x or more of those earnings - $8.0 million plus.
So, while earnings increased by 4.0x in our example, business value increased by 6.5x.
And you have done more than earn a higher multiple, you have more scale to pursue larger opportunities, and you have added to your employee and management bench.
You can buy or merge with a like-sized competitor, where you both are valued at a multiple of 2.0x-3.0x earnings, and together the combined earnings are worth a multiple of 4.0x or more.
With many small business owners looking to sell their companies in the coming years, it may be the perfect time for your business to acquire that critical scale and accelerate your business growth through acquisition.
We partner with business owners to help them confidentially approach acquisition targets, pursue terms of a deal, and manage Due Diligence efforts. Talk to us if you would like to start a business acquisition engagement.
